My following Article was published by Financial World Newspaper, a newspaper based in Delhi brought under the editorial leadership of Tehelka.
The Article was also carried by Issues and Concern magazine..
Article:
As the cliché goes ‘Ignorance is Bliss’, Indian policy makers need Dr.Nouriel Roubini, popularly known as Dr.Doom, who predicted the 2008 meltdown, to wake them out of their slumber and get their acts together.
Planning Commission deputy chairman Montek singh Ahluwalia, said he is not expecting the economy to grow at 8 per cent during this year, sharply lower than the 9 per cent rate it had forecast first in July 2010 and reaffirmed in January 2011. The US is struggling with its deficits and credit ratings while the eurozone is precariously poised to default by one of its peripheral countries. The lowering of the US sovereign rating from AAA to AA+ sent shock waves across the global stock markets, the scene is redolent with the grim affairs of 2009. With the downgrading of the world’s economic super power, the experts, with their daggers out, are predicting a second wave of economic slowdown across the globe including India.
Inflation is the biggest headwind for the Indian economy as increasing income, coupled with more government spending and rising crude prices, will keep pressure on the price front, Fuel alone accounts for over 15 percent of the headline inflation index (Wholesale Price Index), according to the ‘Economic and Social Survey of Asia and the Pacific’ by Escap, a $10 increase in oil prices will raise inflation by 0.52%, a $25 increase in oil prices increase inflation by almost 1.5%, thereby neutralizing Reserve Bank of India (RBI)’s efforts to contain inflation. This doesn’t bode well for the inflation which has been dangerously close to a double-digit figure for almost one year now.
The RBI’s attempts to tackle inflation, through monetary policy, fundamental mistakes in our fiscal policies, is leading to all sorts of further problems for the economy in the form of higher interest rates meant to suppress demand. The RBI has tightened policy 11 times since February 2010 owing to high inflation; this sledge hammer approach erodes the very cornerstone on which our economy flourishes – growth.
Foreign institutional investors (FIIs) are likely to infuse only $14 billion (PMEAC Report) into the Indian stock markets during this fiscal year as Indian stocks lose their sheen. This $14 billion is less than half of the $30.3 billion FIIs pumped into the country in the previous fiscal. The automobile sector is an indicator of the robustness of an economy. For long, India’s auto sector has been roaring like never before. But, for the first time in 30 months, Indian vehicle sales dipped by over 15 per cent (PMEAC Report), in July, indicating a slowdown in the economy. Despite all the above indicators which suggest that our economy may hit a black spot there is a silver lining.
The speed at which India’s exports grew in the period that followed the financial meltdown in the West is astonishing. This was possible on account of the change in the composition and the direction of India’s trade. The US and EU which used to account for 46 per cent of India’s exports in 1995, accounted for 32 per cent of exports in 2009(PMEAC Report).
Stunted growth in the west is likely to have a major significance here in India, albeit a positive one i.e. the pressure on commodity prices might ease. Crude oil had fallen to $99.68 on August 8, down from a peak of above $127 in April 2011. On the one hand, if commodity prices soften further or are maintained around the present levels because of growth deceleration in advanced economies, a potential source of inflation in the Indian context might ease.
India attracted the highest ever foreign portfolio inflows in the year 2010 just after the global meltdown. One of the key reasons for the northward surge in capital flows during 2010 was the loose monetary policy being maintained by many central banks in the developed world. Given the fragile economic conditions in the rich world, the loose money policy is unlikely to reverse any time soon and therefore capital flows will continue to remain strong
During the previous global recession, the Indian economy posted a respectable growth of 6.9 per cent in 2008-09. This was possible because growth is fuelled by strong domestic demand. The forces driving domestic demand continue to be in good form in 2011-12, despite the central bank trying hard to contain demand by raising interest rates. We are lucky in that we have a predominantly well cushioned economy, we don’t depend upon others for our growth.
The Indian economy is walking a tightrope not because of the impending global slowdown, but due to the policy paralysis. Policymaking has hit a deadlock in the absence of strong leadership in the government. The government is occupied with issues such as Anna Hazare, Corruption scams or simply fending off the Opposition. For far too long the government is busy defending itself from various attacks and engaged in fruitless rhetoric, rather than undertaking big ticket reforms and taking the country forward. Crucial bills such as the DTC and the GST are embroiled in a political brinkmanship. Key infrastructural reforms, the multi brand retail FDI, mining applications, land and environmental approvals are perennially in the queue on the government’s to-do list. In the past, experts have written obituaries of our economy, but we survived - not just survived but also helped others on our way. Our economy is not so tenuous that every time the US sneezes we catch a cold! We may be growing slower than expected or rather, at a lower rate than we fancied, but definitely recession isn’t staring us in the face anywhere in the near future.
We have a unique opportunity of taking advantage of the current uncertain global environment and differentiating ourselves from the lot, but the onus lies largely with the country’s leadership.
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